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Interim report 2 2017 Net Gaming Europe AB (publ)

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Interim report for the period 1 January – 30 June 2017 All amounts in the report relate to the Group and are stated in SEK thousands unless otherwise indicated. Figures in brackets refer to the corresponding period in the previous year.

Strong momentum drives vigorous growth Second quarter

• Revenue amounted to SEK 42,675 (4,812) thousand, an increase of 787%. • Operating profit before depreciation (EBITDA) was SEK 25,943 (-498) thousand. • Operating profit (EBIT) was SEK 25,688 (-639) thousand.

First six months

• Revenue amounted to SEK 83,639 (8,860) thousand, an increase of 826%. • Operating profit before depreciation (EBITDA) was SEK 50,985 (-1,082) thousand. • Operating profit (EBIT) was SEK 50,485 (-1,360) thousand.

Outlook For the full year 2017, the Board has prepared a forecast for Net Gaming, with EBITDA amounting to circa SEK 110 million. The forecast does not include any additional acquisitions. CEO’s comments

If the first quarter started the year in the best possible way, the second quarter continued in the same way, with continuing strong growth. The second quarter is normally the weakest in the year due to seasonal variations in the gaming industry. Net Gaming’s revenue increased by SEK 37.9 million, corresponding to growth of 787%, while EBITDA increased by SEK 26.4 million compared with the same period the previous year. The development within our business segment lead generation in 2017 has been stronger than expected, with revenue for the second quarter showing organic growth of 25% and adjusted EBITDA increasing by as much as 45% compared with the same period the previous year. Revenue for the first six months of 2017 increased by 17%, while EBITDA increased by 29% compared with the same period the previous year. This

should be seen in relation to the fact that Highlight Media showed revenue growth of about 12% for the full year 2016 compared with 2015 and adjusted EBITDA growth of about 28% compared with the previous year. It is of course pleasing to be able to say that Highlight Media also continues to perform well under Net Gaming’s control and I see good opportunities for continuing growth. I have received a number of questions about our reported tax expense. Normally Net Gaming is most likely to meet the basic requirements for tax reduction in Malta, which means that the effective tax rate in the Group will be around 5%. Because we also have unutilized tax loss carry-forwards, our effective tax will be 0% right now. In line with accounting principles, the loss carry-forwards are recognized as an expense directly in the income statement. This, despite the fact that no current tax expense arises and no tax has to be paid. The growth strategy we have developed also includes acquisitions, which we review continuously. There are a few interesting acquisition candidates, but this is also dependent on the required funding being in place, and Net Gaming’s Board is therefore looking at different options for optimising the capital structure. Marcus Teilman, President and CEO


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Significant events in the second quarter

• SEK 8,999,995.50 of the convertible debenture has been converted into 1,999,999 new shares.

• Board members Jonas Bertilsson, Tobias Fagerlund, Henrik Kvick, Jonas Söderqvist and Marcus Teilman were re-elected at the annual general meeting on 30 May 2017.

• The meeting on 30 May 2017 also adopted the introduction of a new incentive programme consisting of 1,200,000 employee share options. The share options give entitlement to subscribe for 1,200,000 new shares in Net Gaming and can be exercised in the period 1 July 2020 – 30 August 2020.

• Net Gaming has paid an additional consideration related to the acquisition of HLM Malta Ltd. Approx. EUR 5.5 million was settled in cash and the remaining approx. EUR 1.7 million in shares. Approx. EUR 2.4 million of the EUR 5.5 million payment was made after the end of the quarter.

Significant events after the end of the quarter

• The new share issue for payment of the additional purchase consideration associated with the acquisition of HLM Malta Ltd has been registered by the Swedish Companies Registration Office, corresponding to 1,544,772 new shares.

• SEK 7,499,997.50 of the convertible debenture has been converted into 1,666,666 new shares.

Description of Net Gaming Net Gaming currently operates two different business areas: affiliation/lead generation and iGaming operations. Affiliate operations are conducted through Highlight Media and account for about 93% of Net Gaming’s total revenue. iGaming operations are conducted under two brands: PokerLoco and CasinoLoco. Affiliate operations Highlight Media was founded in 2003 and is a pioneer in lead generation in iGaming, in other words an Affiliate. PokerListings, one of the world’s most prominent and well-known brands in the poker segment, was launched in 2003. CasinoTop10 was launched in 2004 and a number of additional brands have also been launched since then. HLM currently operates over 130 sites in 30 countries. Highlight has over 80 employees, 10 of whom work through consulting agreements. Content writers, developers, project managers, SEO specialists, designers and other staff are based at the office in Malta. The focus is on systematically and methodically working every day to provide a

high-quality product for the end users, namely the online players. This is done by developing websites with a large amount of quality content, such as poker and casino guides, rules and strategies on how to play poker, reviews of iGaming operators, leader boards for iGaming operators, and bonuses, banners and targeted offers for players. When a player clicks on one of these links on Highlight’s websites, they are taken to the iGaming operator in question. This process is called a lead. Once the player has created an account with the iGaming operator and made their first deposit, this triggers a payment to Highlight (Qualified Referral). The focus is on quality and well-written content, which gives online players a sense of security and quality, and is a direct success factor for Highlight. Highlight has a proprietary Business Intelligence system that has collected a large amount of data over several years, which means that Highlight’s traffic is constantly and progressively optimised to increase the quality of referrals to iGaming operators, thereby increasing competitiveness and allowing higher payment for the services provided.


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Revenue distribution by segment

The majority of HLM’s revenue comes from casino and poker. About 3% of the revenue comes from finance, while other revenue comes from areas such as bingo, e-sport, lotto and fantasy sports. Revenue models för Casino and Poker

HLM’s payments come through different revenue models. The most common model is CPA (cost per acquisition). This is non-recurring revenue that HLM receives when it has referred a paying player to one of its customers (operators). HLM considers CPA to be one of the most attractive models for receiving payment, as Highlight constantly optimises its traffic to increase conversion rates and the quality of its leads. Another way to receive payments is through revenue sharing. Under this model, HLM is paid over time as players registered with the operators continue to play. HLM also receives payments through a combination of these two (hybrid) or any other methods, such as permanent advertising space.

Geographic distribution of Casino and Poker

HLM’s revenue comes mainly from different European markets, such as France, the Netherlands, Italy, Spain, the UK and Germany. Essentially all markets developed positively in the second quarter of 2017, and in particular Nordic, South America and Rest of world are expected to account for an increasing share of total revenue in the long term. About 54% of the traffic to HLM’s sites comes from mobile devices. FTD development for Casino and Poker

The chart above shows a type of index for FTD development over time for casino and poker aggregated. FTD stands for first time depositor, i.e. a newly depositing customer that HML has referred to one of its customers (operators).

0%

21%

76%

3%

Other

Poker

Casino

Mortgage

79%

12%

7% 2%

CPA

Rev Share

Hybrid

Other

4%

75%

9%

1%11%

Nordic

Europe

North America

South America

Rest of world

0200400600800

100012001400

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2

2015 2016 2017


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FTD development for Casino

Growth for casino has been clearly stronger, as shown in the chart above. It is particularly pleasing to see the positive trend since Net Gaming completed the acquisition of Highlight, with a number of new initiatives subsequently launched that have had a direct positive effect on growth in the number of depositing customers and the Group’s revenue. Additional purchase consideration for Highlight Net Gaming has paid the seller of HLM approx. EUR 7.2 million of the total additional consideration of approx. EUR 12.9 million. Net Gaming considers it highly likely that the additional consideration, which means 5.5 MEUR, will be paid in full, given the strong earnings growth HLM has shown. iGaming operations PokerLoco is an iGaming operator that was founded in 2005, with a strong focus on Latin America. CasinoLoco was launched in 2013 and in the same year, both sites were launched on a proprietary technical platform. This allows customisation of the game software suppliers and payment methods that are offered to players, rather than being dependent on a third-party system that often has long lead times for

making changes. The iGaming operations currently have a total database of over 1 million registered players, as well as extensive data on the gaming behaviour of different customer groups, both in terms of the type of game and behaviour in local markets. This information is significant from a customer loyalty perspective, as it is important to retain customers in order to increase their total player value, but it also provides synergies for our business segment lead generation, which can then continue to optimise its content by making it more relevant for visitors, particularly in local markets, but also through various niche brands. Geographic distribution of PokerLoco

The pie chart above shows the distribution of the number of active players per geographic market. “Rest of world” is virtually exclusively Latin America. The value per player from Latin America is much lower than for a player from Europe. It is Net Gaming’s assessment that Latin America has great potential in the long term and it is therefore part of the long-term strategy to focus on Latin America. The proportion of active players and the share of revenue from Latin America has increased in recent years and this is a trend we hope will persist.

0

500

1000

1500

2000

2500

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2

2015 2016 2017

69%11%

20%Europe

Nordic

Rest of world


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Tax expense and deferred tax Tax expense consists of both current tax, i.e. tax on taxable income for the year, and changes in deferred tax assets and tax liabilities. Current tax is based on taxable profit for the year. The tax rate in Malta is 35%, but we believe that we reach the conditions to obtain a tax reduction in connection with dividends, which means that the effective tax rate for the Group can be about 5%. For the Group, Net Gaming reports current tax on taxable income for the year for the companies that have tax surpluses and reduces tax expense by the tax reduction received only when all criteria for obtaining a tax reduction are met. Deferred tax is the tax that the Company expects to pay or receive due to differences between the carrying amounts of assets and liabilities and their corresponding tax bases used in the calculation of taxable profit. Deferred tax assets arising from the carryforward of unused tax losses are recognised to the extent that it is probable that they can be utilised and will result in lower tax payments in the future. There are unutilised tax loss carryforwards from previous years in the acquired company HLM Malta Limited and its underlying group. When tax loss carryforwards are utilised, the effect in the financial statements is that deferred tax assets are reduced and the change in deferred tax assets is recognised as a tax expense. This is despite the fact that no current tax expense arises and no tax has to be paid. The distribution of current tax and change in deferred tax is shown in the table below.

01/04/2017 01/04/2016 01/01/2017 01/01/2016

Amounts in SEK thousands 30/06/2017 30/06/2016 30/06/2016 30/06/2017

Group

Current tax

-7,855 - -14,318 -

Deferred tax

1,370 - 2,689 -

Total tax

-6,485 0 -11,629 0

Parent Company

Current tax

- - - -

Deferred tax

234 - 380 -

Total tax

234 0 380 0


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Consolidated Statement of Comprehensive Income

01/04/2017 01/04/2016 01/01/2017 01/01/2016

Amounts in SEK thousands 30/06/2017 30/06/2016 30/06/2017 30/06/2016

Revenue, affiliate operations 40,251 - 77,720 -

Revenue, gaming operations 2,424 4,812 5,919 8,860

Total revenue 42,675 4,812 83,639 8,860

Operating expenses, gaming operations -766 -1,626 -1,719 -3,046

Capitalised work for own account 77 67 152 173

Marketing expenses -4,088 -2,702 -7,647 -5,095

Other external expenses -4,396 -885 -8,702 -1,360

Personnel expenses -7,765 -466 -15,243 -1,007

Other operating income 268 302 567 393

Other operating expenses -62 - -62 -

EBITDA 25,943 -498 50,985 -1,082

Depreciation and amortisation -255 -141 -500 -278

Operating profit/loss (EBIT) 25,688 -639 50,485 -1,360

Interest and similar income - - - -

Interest and similar expenses -11,916 -112 -23,454 -152

Other financial items 695 - 535 -

Net financial items -11,221 -112 -22,919 -152

Profit/loss before tax 14,467 -751 27,566 -1,512

Tax -6,485 – -11,629 –

Profit/loss for the year 7,982 -751 15,937 -1,512

Earnings per share (SEK) 0.13 -0.01 0.27 -0.03

Earnings per share after dilution (SEK) 0.09 0.18

Other comprehensive income,

income and expenses recognised directly in equity

Exchange differences on translation of foreign

operations -839 -214 -591 -362

Other comprehensive income for the year -839 -214 -591 -362

Total comprehensive income for the period 7,143 -965 15,346 -1,874

Comprehensive income per share (SEK) 0.12 -0.02 0.26 -0.03

Comprehensive income per share after dilution (SEK) 0.08 0.17


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Consolidated Statement of Financial Position

Amounts in SEK thousands 30/06/2017 31/12/2016 30/06/2016

ASSETS

Non-current assets

Property, plant and equipment 710 761 45

Goodwill 370,254 370,254 -

Other intangible assets 5,628 5,707 5,761

Other non-current receivables 5,016 6,911 -

Deferred tax assets 36,804 36,338 -

Total non-current assets 418,412 419,971 5,806

Current assets

Trade receivables 14,221 14,390 96

Other current assets 11,306 10,808 734

Cash and bank balances 44,659 58,999 39,621

Total current assets 70,186 84,197 40,451

TOTAL ASSETS 488,598 504,168 46,257

EQUITY AND LIABILITIES

Equity 45,226 4,456 -2,826

Provisions

Other provisions 53,311 52,725 -

Non-current liabilities

Liabilities to parent company - - 34,000

Other non-current liabilities 295,136 332,409 -

Deferred tax liabilities 8,533 10,998 -

Total non-current liabilities 303,669 343,407 34,000

Current liabilities

Trade payables 2,063 3,249 718

Liabilities to Parent Company 3,324 3,243 2,383

Tax liabilities 15,790 1,337 -

Other current interest-bearing liabilities 20,000 - -

Other current non-interest-bearing liabilities 45,215 95,751 11,982

86,392 103,580 15,083

TOTAL EQUITY AND LIABILITIES 488,598 504,168 46,257


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Consolidated Statement of Changes in Equity

Not Other Retained Share registrered paid-in Translation earnings Total

capital capital capital reserve incl. year’s equity

Opening equity, 1 Jan 2016 14,957 – 28,559 -1,921 -42,547 -952

Equity component of convertible debenture – – 8,169 – – 8,169

Deferred tax on equity component – – -1,797 – – -1,797

Comprehensive income for the year – – – -976 12 -964

Closing equity, 31 Dec 2016 14,957 – 34,931 -2,897 -42,535 4,456

Opening equity, 1 Jan 2017 14,957 – 34,931 -2,897 -42,535 4,456

Comprehensive income for the period – – – 248 7,955 8,203

Closing equity, 31 Mar 2017

14,957 – 34,931 -2,649 -34,580 12,659

Opening equity, 1 Apr 2017 14,957 – 34,931 -2,649 -34,580 12,659

Conversion into shares, Apr 2017 519 – 8,036 – – 8,555

Settlement issue decided 30 Jun 2017 – 402 16,467 – – 16,869

Comprehensive income for the period – – – -839 7,982 7,143

Closing equity, 30 Jun 2017

15,476 402 59,434 -3,488 -26,598 45,226

Consolidated Cash Flow Statement

01/04/2017 01/04/2016 01/01/2017 01/01/2016 Amounts in SEK thousands

30/06/2017 30/06/2016 30/06/2017 30/06/2016

Cash flow from operating activities 26,499 2,743 49,797 3,507

Cash flow from investing activities -54,173 -86 -54,260 -196

Cash flow from financing activities -10,667 34,000 -10,760 34,000

Cash flow for the period -38,341 36,657 -15,223 37,311

Cash & cash equivalents at beginning of period 82,144 2,987 58,999 2,453

Exchange rate differences in cash 569 90 467 111

Translation differences on consolidation of subsidiaries 287 -113 416 -254

Cash & cash equivalents at end of period 44,659 39,621 44,659 39,621


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Key figures, Group

01/04/2017 01/04/2016 01/01/2017 01/01/2016 30/06/2017 30/06/2016 30/06/2017 30/06/2016

Operating margin 60% neg 60% neg

Equity/assets ratio 9% -6% 9% -6%

Return on equity 28% neg 64% neg

Equity per share, SEK 0.76 -0.05 0.76 -0.05

Number of shares at beginning of period 57,525,000 57,525,000 57,525,000 57,525,000

Number of shares at end of period 59,524,999 57,525,000 59,524,999 57,525,000

Average number of shares during period 59,191,666 57,525,000 58,309,530 57,525,000

Number of shares on maximum dilution 89,836,111 89,836,111

Market price per share at end of period 8.60 3.13 8.60 3.13

Definitions of key figures

Operating margin Operating profit/loss as a percentage of sales.

Equity/assets ratio Equity as a percentage of total assets.

Return on equity Profit/loss after tax divided by average equity.

Earnings per share, SEK Profit/loss after tax divided by the average number of shares.

Equity per share, SEK Equity divided by the number of shares outstanding.


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Income Statement – Parent Company


30/06/2017 30/06/2016 30/06/2017 30/06/2016

Revenue 131 383 233 727

Total revenue 131 383 233 727

OPERATING EXPENSES

Other external expenses -1,020 -342 -1,586 -542

Personnel expenses -34 -170 -46 -375

Other operating income -165 - -62 -

Operating profit/loss -1,088 -129 -1 461 -190

Profit/loss from financial items

Profit/loss from investments in Group companies 9,741 -5 9,684 -61

Other interest and similar income 3,933 108 7,612 215

Interest and similar expenses -11,806 -112 -23,453 -152

Profit/loss after financial items 780 -138 -7,618 -188

Tax on profit/loss for the year 234 – 380 –

Profit/loss for the year

1,014 -138 -7,238 -188


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Balance Sheet – Parent Company

Amounts in SEK thousands

30/06/2017 31/12/2016 30/06/2016

ASSETS

Non-current assets

Financial assets

Investments in Group companies 324,562 324,562 11

Non-current receivables from Group companies 86,195 116,286 12,574

Other non-current receivables 5,016 6,911 –

Total financial assets 415,773 447,759 12,585

Total non-current assets 415,773 447,759 12,585

Current assets

Current receivables

Receivables from Group companies 5,812 24,653 710

Other current assets 5,520 5,724 167

Cash and bank balances 25,010 20,011 34,064

Total current assets 36,342 50,388 34,941

TOTAL ASSETS 452,115 498,147 47,526

EQUITY AND LIABILITIES

Equity 45,138 26,952 10,018

Provisions

Other provisions 53,311 52,725 -

Non-current liabilities

Liabilities to Parent Company - - 34,000

Other non-current liabilities 295,136 332,409 -

Deferred tax liabilities 1,290 1,670 -

Total non-current liabilities 296,426 334,079 34,000

Current liabilities

Trade payables 240 441 420

Liabilities to Parent Company 3,324 3,243 2,383

Liabilities to Group companies 1,054 1,043 –

Other current interest-bearing liabilities 20,000 - -

Other current non-interest-bearing liabilities 32,622 79,664 705

57,240 84,391 3,508

TOTAL EQUITY AND LIABILITIES 452,115 498,147 47,526


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Statement of Changes in Equity – Parent Company

Not Retained Share registrered Translation earnings Total

capital capital reserve incl. year’s equity

Parent Company

Opening equity, 1 Jan 2016 14,957 – – -4,751 10,206

Equity component of convertible debenture – – 8,169 – 8,169

Deferred tax on equity component – – -1,797 – -1,797

Comprehensive income for the year – – – 10,375 10,375

Closing equity, 31 Dec 2016 14,957 – 6,372 5,624 26,952

Opening equity, 1 Jan 2017 14,957 – 6,372 5,624 26,952

Comprehensive income for the period – – – -8,252 -8,252

Closing equity, 31 Mar 2017

14,957 – 6,372 -2,628 18,700

Opening equity, 1 Apr 2017 14,957 – 6,372 -2,628 18,700

Conversion into shares, Apr 2017 519 – 8,036 – 8,555

Result of the AGM – – -6,372 6,372 –

Settlement issue decided 30 Jun 2017 – 402 16,467 – 16,869

Comprehensive income for the period – – – 1,014 1,014

Closing equity, 30 Jun 2017

15,476 402 24,503 4,758 45,138

Condensed Cash Flow Statement – Parent Company


30/06/2017 30/06/2016 30/06/2017 30/06/2016

Cash flow from operating activities 28,852 -18 28,378 -42

Cash flow from investing activities -53,959 - -53,959 –

Cash flow from financing activities 30,544 34,000 30,451 34,000

Cash flow for the period 5,437 33,982 4,870 33,958

Cash & cash equivalents at beginning of period 19,444 82 20,011 106

Exchange rate differences in cash 129 – 129 –

Cash & cash equivalents at end of period

25,010 34,064 25,010 34,064


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Segment reporting Management has determined the operating segments based on the reports reviewed by the Parent Company’s CEO and submitted to the Board. These are used to make strategic decisions. The key yardstick for the Parent Company’s CEO and Board of Directors in evaluating the operating segments’ operations is EBITDA. The Group reports in two main operating segments – gaming operations and affiliate operations. Gaming operations consist of PokerLoco Malta Limited and its subsidiary Loco Online Entertainment N.V. Affiliate operations consist of HLM Malta Limited and its subsidiaries Rock Intention Malta Limited, Chance Publications Malta Limited, Match Publications Malta Limited and Mortgage Loan Directory and Information LLC, Delaware, USA. The Parent Company Net Gaming Europe obtains its revenue from consulting services in IT, marketing, financial services, control and management. The ‘Other’ segment, shown in the table below, includes the dormant Group companies Valdemo Trading Limited, Eurobet Operation Limited and Loco Marketing Sociedad Anonima, and eliminations of intragroup transactions. Amounts in SEK thousands

Net iGaming Affiliate

1 Jan 2017 – 30 Jun 2017 Gaming operations operation Other Total

Revenue 233 5,919 77,720 -233 83,639

Operating expenses, iGaming operations – -1,719 – – -1,719

Capitalised work for own account

– 152 – – 152

EBITDA -1,461 -911 53,410 -53 50,985

Profit/loss before tax -7,618 -1,291 46,185 -9,710 27,566

Profit/loss after tax -7,238 -1,291 34,176 -9,710 15,937

Assets

Property, plant and equipment – 36 674 – 710

Goodwill – – 370,254 – 370,254

Other intangible assets – 5,628 – – 5,628

Financial assets 415,773 – – -410,757 5,016

Deferred tax assets – – 36,804 – 36,804

Current assets 36,342 2,554 38,348 -7,058 70,186

Total assets 452,115 8,218 446,080 -417,815 488,598

Liabilities and provisions

Provisions 53,311 – – – 53,311

Other non-current liabilities 295,136 15,916 – -15,916 295,136

Deferred tax liabilities 1,290 – 7,243 – 8,533

Current liabilities 57,240 9,097 97,441 -77,386 86,392

Total liabilities and provisions 406,977 25,013 104,684 -93,302 443,372


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Net iGaming

1 Jan 2016 – 30 Jun 2016 Gaming operations Other Total

Revenue 727 8,860 -727 8,860

Operating expenses, iGaming operations – -3,046 – -3,046

Capitalised work for own account

– 173 – 173

EBITDA -190 -842 -50 -1,082

Profit/loss before tax -188 -1,352 28 -1,512

Profit/loss after tax -188 -1,352 28 -1,512

Assets 47,526 12,038 -13,307 46,257

Liabilities 37,508 24,859 -13,284 49,083

Related party transactions

01/04/2017 01/04/2016 01/01/2017 01/01/2016

Parent Company 30/06/2017 30/06/2016 30/06/2017 30/06/2016

Sales of services to subsidiaries 131 383 233 727

Interest income from subsidiaries 3,540 108 7,219 215

Interest expenses to other related parties -40 -109 -80 -149

Receivables from subsidiaries 94,472 15,749

Accumulated impairment of receivables from subsidiaries -2,465 -2,465

Carrying amount of receivables from subsidiaries 92,007 13,284

Liabilities to other related parties 3,324 36,383


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Upcoming financial reports Interim report 3 2017: 23 November 2017 Year-end report 2017: 22 February 2018 Annual Report: published 27 April 2018 Interim report 1 2018: 24 May 2018 The Annual General Meeting will be held on 24 May 2018 Accounting policies This interim report has been prepared in accordance with IAS 34. The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards, IFRS. This interim report has not been reviewed by the Company’s auditors. Stockholm, 22 August 2017 Board of Directors For further information, contact Marcus Teilman, President and CEO, telephone +46 8 410 380 44 or mobile +356 9936 7352 [email protected]

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